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1 TransCanada Keystone Pipeline GP Ltd Keystone XL Pipeline Section Application Section : Supply and Markets Page of 0 SUPPLY AND MARKETS This section provides oil supply and market information, including: a summary of the Western Canada Sedimentary Basin ( WCSB ) oil supply; supply access at the Hardisty, Alberta hub; an overview of the United States Gulf Coast ( USGC ) market for the Keystone XL Pipeline (the Project for the Canadian portion); and a summary of the findings of an independent supply and market assessment prepared by Purvin & Gertz, Inc ( PGI ) A copy of the PGI assessment is provided in Appendix - 0 WCSB Supply Forecast The primary source of supply for the Keystone XL Pipeline is the Alberta oil sands The Energy Resources Conservation Board reports that there are billion cubic metres ( m ) or billion barrels ( bbl ) of remaining established reserves of bitumen in the Alberta oil sands There are sufficient bitumen reserves in Alberta to sustain development of new oil sands projects for decades Several projects currently under construction will add to supply and future export requirements 0 In late 00, there were announcements of the delay or cancellation of several proposed upgrader projects, due to both the high development costs in Alberta and the reduced differential between light and heavy crude oil prices At this time, bitumen projects are more economic to develop than upgraded synthetic crude oil projects This is expected to increase the supply of heavy crude in the next few years, which emphasizes the need to find new export markets for heavy crude oil The Keystone XL Pipeline will be in a position to access new markets for crude oil supply, both for increased supply of heavy crude in the short term, and for future supply of light synthetic crude if the economics of upgrading projects in Alberta improve

2 TransCanada Keystone Pipeline GP Ltd Keystone XL Pipeline Section Application Section : Supply and Markets Page of Several crude supply forecasts are presented in the PGI supply and market assessment that is discussed in Section The Canadian Association of Petroleum Producers ( CAPP ) published a report in June 00 titled Crude Oil Forecast, Markets and Pipeline Expansions ( CAPP forecast ) The pipeline planning case in the CAPP forecast projects that Alberta oil sands production will increase by,000 cubic metres per day ( m /d ) or million barrels per day ( bbl/d ) between 00 and 0 The growth in oil sands production is expected to more than offset declining conventional crude production The CAPP forecast projects that overall WCSB crude oil supply will grow by 0,000 m /d or million bbl/d over the same period 0 CAPP prepared an interim WCSB supply forecast update in December 00 The interim forecast projects a decline in the growth of light crude oil supply in comparison with the June 00 forecast, due to the delay of several projects However, the interim forecast continues to show significant growth in heavy crude oil supply and overall oil supply 0 TransCanada Keystone Pipeline GP Ltd ( Keystone ) concludes that this supply growth will require access to new crude oil markets, underpinning the need for the Keystone XL Pipeline As noted in the CAPP forecast, US Petroleum Administration for Defence District ( PADD ) III is the largest untapped market for western Canadian crude oil producers Shippers approached Keystone to provide new capacity to the USGC market and have confirmed their desire to have the Keystone XL Pipeline completed expeditiously Further, shippers have recently reconfirmed to Keystone, their desire for the Project to continue to proceed, consistent with the currently proposed Project schedule Hardisty Supply Access Hardisty is a major hub for the western Canadian petroleum industry It is connected to pipelines from Edmonton, Cold Lake, Lloydminster and Fort McMurray, Alberta The

3 TransCanada Keystone Pipeline GP Ltd Keystone XL Pipeline Section Application Section : Supply and Markets Page of total inbound pipeline capacity to Hardisty of approximately,000 m /d ( million bbl/d) is also supplemented by transportation of petroleum by rail and truck In addition to significant receipt capability, the Hardisty area has a storage capacity of approximately million m ( million bbl) (see Figure -) This very liquid trading hub will provide the Keystone XL Pipeline with access to a wide variety of light and heavy crude supply for shipment to the USGC market Figure -: Hardisty Terminal Area USGC Market Overview and Outlook 0 The target market for the Keystone XL Pipeline is the USGC, located within PADD III, which is the largest refining market in the world PADD III currently has million m /d ( million bbl/d) of crude refining capacity, mainly in Texas and Louisiana Shippers have committed to Keystone for delivery of 0,00 m /d (0,000 bbl/d) to the USGC market The Keystone XL Pipeline is proposed to terminate in the Nederland, Texas area (near Port Arthur, Texas), with a planned extension to Houston, Texas Existing pipeline

4 TransCanada Keystone Pipeline GP Ltd Keystone XL Pipeline Section Application Section : Supply and Markets Page of connections from the Nederland terminal area can provide access to Houston and Texas City, Texas and Lake Charles, Louisiana refineries via other pipelines The total refining market directly accessible to Canadian crude via the Keystone XL Pipeline will be about,000 m /d ( million bbl/d), as shown in Table - Table -: USGC Refining Market Available to the Keystone XL Pipeline Refinery m /d (x,000) bbl/d (x,000) Valero Energy, Port Arthur Motiva Enterprises, Port Arthur Motiva Enterprises Expansion, Port Arthur Total Petrochemicals, Port Arthur ExxonMobil Corp, Beaumont Subtotal: Port Arthur Area,0 Valero Energy, Houston Houston Refining (Lyondell), Houston Pasedena Refining, Pasedena 00 Shell Deer Park, Deer Park 0 ExxonMobil Corp, Baytown 0 Subtotal: Houston Area, BP, Texas City 0 Marathon Oil, Texas City Valero Energy, Texas City 00 Subtotal: Texas City Area Calcasieu Refining, Lake Charles CITGO, Lake Charles 0 ConocoPhillips, Lake Charles 0 Subtotal: Lake Charles Area Total Refining Market,0 NOTE: This expansion is planned to be complete by 0 The refining industry in PADD III has a large coking capacity As a result, many refineries are capable of handling a variety of crude oils, including a significant amount of heavy crude oil

5 TransCanada Keystone Pipeline GP Ltd Keystone XL Pipeline Section Application Section : Supply and Markets Page of Heavy crude runs for the target refineries in Table - are estimated by PGI at,00 m /d ( million bbl/d) for 00, nearly all of which were imported Additionally, light crude runs in 00 were estimated at,000 m /d ( million bbl/d), of which,00 m /d ( million bbl/d) were imported The Keystone XL Pipeline provides Canadian crude producers and USGC refiners with an opportunity to supply a portion of the total of 0,00 m /d ( million bbl/d) of heavy and light crude imports into PADD III Furthermore, shippers on the Keystone XL Pipeline have made binding long term commitments to connect Alberta production to the USGC market 0 Supply and Market Assessment by PGI Keystone engaged PGI to conduct an independent assessment of the supply and disposition of Western Canadian crude oil to markets in the US, including the Gulf Coast, and the price impact of connecting Canadian supply to this new market The PGI assessment considers: 0 Western Canada crude oil supply; the US crude oil market; Canadian crude oil disposition; the US Gulf Coast crude oil market; PADD II crude oil market; Canadian crude oil pricing impact; and pipeline capacity requirements

6 TransCanada Keystone Pipeline GP Ltd Keystone XL Pipeline Section Application Section : Supply and Markets Page of The key findings of the PGI assessment, a copy of which is provided in Appendix -, with respect to supply, markets, pricing impact and pipeline capacity, are discussed below Supply There is a range of Western Canadian crude oil supply forecasts From 00 to 0, crude supply is forecast to increase by as little as,000 m /d ( million bbl/d) in the lowest case, to as much as,000 m /d ( million bbl/d) in the highest case These overall forecast increases are the result of growing production from the oil sands Markets 0 The Keystone XL Pipeline s target market, PADD III and specifically the USGC, is the largest refining market in the world with approximately million m /d ( million bbl/d) of crude capacity, mainly in Texas and Louisiana The Keystone XL Pipeline will provide pipeline access to approximately,000 m /d ( million bbl/d) of refinery capacity in the Port Arthur, Houston, Texas City and Lake Charles areas 0 The large PADD III market currently accesses very little Canadian crude oil This access is currently limited to the Pegasus Pipeline, which provides only 0,00 m /d (,000 bbl/d) of transportation capacity Refineries in this market have a large coking capacity and can run significant amounts of heavy crude, which are similar to Canadian bitumen blends The production of crude in the US continues to decline, and imports will increase due to rising demand by US refineries combined with declining domestic supply Traditional supply sources of heavy crude for the USGC, such as Mexico and Venezuela, are

7 TransCanada Keystone Pipeline GP Ltd Keystone XL Pipeline Section Application Section : Supply and Markets Page of declining and some USGC refiners are diversifying their supply sources by obtaining access to Western Canadian crude PGI expects that the USGC market could absorb at least an incremental,00 m /d (00,000 bbl/d) of Canadian crude, which represents approximately % of the crude capacity of the refineries in the Port Arthur, Houston, Texas City and Lake Charles areas Crude Pricing Impact Existing markets for Canadian heavy crude, principally PADD II, are currently oversupplied, resulting in price discounting for Canadian heavy crude oil 0 Access to the USGC via the Keystone XL Pipeline is expected to strengthen Canadian crude oil pricing in PADD II by removing this oversupply This is expected to increase the price of heavy crude to the equivalent cost of imported crude Similarly, if a surplus of light synthetic crude develops in PADD II, the Keystone XL Pipeline would provide an alternate market and therefore help to mitigate a price discount The resultant increase in the price of heavy crude is estimated to provide an increase in annual revenue to the Canadian producing industry in 0 of US $ billion to US $ billion Pipeline Capacity 0 Based on the PGI forecast of heavy oil supply growth, it is projected that, without the Keystone XL Pipeline, heavy crude oil pipeline capacity from Western Canada will be fully utilized by 0 Using the supply forecast in the CAPP interim update of December 00, PGI concludes that capacity for heavy crude oil will be fully utilized by 0

8 TransCanada Keystone Pipeline GP Ltd Keystone XL Pipeline Section Application Section : Supply and Markets Page of Summary Keystone has reviewed the PGI assessment and agrees with its conclusions Shippers on the Keystone XL Pipeline have contracted for access to the USGC market for their oil sands production and refining needs Not only will this directly benefit these shippers, it will also provide a benefit to all WCSB heavy crude producers by increasing the price they receive for their crude, as well as providing significant pipeline capacity to an alternative market

9 TransCanada Keystone Pipeline GP Ltd Keystone XL Pipeline Section Application Section : Supply and Markets, Appendix - Page of 0 APPENDIX - SUPPLY AND MARKET ASSESSMENT PURVIN & GERTZ INC

10 WESTERN CANADIAN CRUDE SUPPLY AND MARKETS Prepared for: TRANSCANADA KEYSTONE PIPELINE GP LTD Prepared by: Buenos Aires Calgary Dubai Houston London Los Angeles Moscow Singapore February, 00 TH Wise

11 ABOUT THIS REPORT This report has been prepared for the exclusive benefit of TransCanada Keystone Pipeline GP Ltd (Keystone) for the purpose of the facilities application to the National Energy Board (NEB) for the Keystone XL Pipeline Any party other than Keystone and the NEB in possession of the report may not rely upon its conclusions without the written consent of Purvin & Gertz Possession of the report by third parties does not carry with it the right of publication Changes in factors upon which the review is based could affect the results All results are based on information available at the time of review In preparing this report and the opinions recorded in this report, Purvin & Gertz relied upon data and information provided by reliable industry sources Purvin & Gertz does not accept responsibility for errors or inaccuracies in information provided by others Forecasts are inherently uncertain because of events or combinations of events that cannot reasonably be foreseen including the actions of government, individuals, third parties and competitors

12 Table of Contents Page -- i TABLE OF CONTENTS INTRODUCTION WESTERN CANADIAN CRUDE OIL SUPPLY US CRUDE OIL MARKET CANADIAN CRUDE OIL DISPOSITION US GULF COAST CRUDE OIL MARKET PADD II CRUDE OIL MARKET CANADIAN CRUDE OIL PRICING PIPELINE CAPACITY REQUIREMENTS SUMMARY AND CONCLUSIONS

13 ii -- Page Table of Contents LIST OF FIGURES FIGURE WESTERN CANADA CRUDE SUPPLY FORECAST COMPARISON FIGURE OIL SANDS PRODUCTION FORECAST COMPARISON FIGURE US CRUDE OIL SUPPLY / DEMAND FIGURE PETROLEUM ADMINISTRATION FOR DEFENSE DISTRICTS (PADDS) FIGURE WESTERN CANADA CRUDE SUPPLY/DEMAND FORECAST0 FIGURE PADD III CRUDE RUNS BY SOURCE FIGURE PADD III HEAVY CRUDE SUPPLY FIGURE MEXICO HEAVY CRUDE BALANCE FIGURE VENEZUELA CRUDE BALANCE FIGURE 0 KEYSTONE XL PIPELINE MARKET AREA FIGURE PADD II CRUDE RUNS BY SOURCE FIGURE FORECAST COMPARISON OF CANADIAN CRUDE DELIVERIES TO PADD II FIGURE COLD LAKE BLEND PRICING FIGURE TOTAL CRUDE EXPORTS VS PIPELINE CAPACITY FIGURE HEAVY CRUDE EXPORTS VS PIPELINE CAPACITY FIGURE HEAVY CRUDE OIL PIPELINE CAPACITY VS DISPOSITION 0 LIST OF TABLES TABLE WESTERN CANADIAN CRUDE SUPPLY AND DISPOSITION TABLE WESTERN CANADIAN CRUDE SUPPLY AND DISPOSITION SCENARIOS0 TABLE PADD III REFINERY CRUDE CAPACITY0 TABLE PADD III REFINERY CRUDE TYPES AND SOURCES TABLE CAPACITIES OF EXPORT PIPELINES FOR CANADIAN CRUDE: 0 TABLE WESTERN CANADIAN HEAVY CRUDE SUPPLY AND DISPOSITION TABLE WESTERN CANADIAN HEAVY CRUDE SUPPLY & DISPOSITION SCENARIOS

14 TransCanada Keystone Pipeline GP Ltd Western Canadian Crude Supply and Markets -- INTRODUCTION 0 TransCanada Keystone Pipeline GP Ltd ( Keystone ) is planning the Keystone XL Pipeline project to deliver Canadian crude oil from Hardisty, Alberta to Nederland, Texas near Port Arthur and Houston, Texas at the US Gulf Coast ( USGC ) by late 0 The pipeline will be able to deliver a range of crudes from light to heavy crude It will provide incremental capacity to deliver 00,000 barrels per day ( B/D ), or thousand cubic metres per day ( 0 m /d ) to the USGC Currently, there are shipper commitments for 0,000 B/D (0 0 m /d) for the Keystone XL Pipeline, subject to regulatory approval Keystone is making a facilities application (the Application ) to the National Energy Board ( NEB ) for the Canadian section of its pipeline from Hardisty to the US border Keystone retained Purvin & Gertz, Inc ( Purvin & Gertz or PGI ) to provide evidence regarding Western Canadian crude oil supply and the USGC market to be supplied by the proposed Keystone XL Pipeline The topics discussed in this report include Western Canadian crude oil supply, the US crude oil market, Canadian crude oil disposition, the USGC crude oil market, the US Midwest crude oil market, Canadian crude oil pricing and pipeline capacity requirements The Summary and Conclusions are at the end of the discussion

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16 TransCanada Keystone Pipeline GP Ltd Western Canadian Crude Supply and Markets -- WESTERN CANADIAN CRUDE OIL SUPPLY 0 Western Canada has very large oil reserves due mainly to bitumen in oil sands The Canadian Association of Petroleum Producers ( CAPP ) estimated the remaining established reserves of conventional crude oil and pentanes plus in Western Canada at million cubic metres ( billion barrels) at December, 00 The Energy Resources Conservation Board ( ERCB ) of Alberta estimated the remaining established reserves of crude bitumen in oil sands at billion cubic metres ( billion barrels) at the end of 00 At an annual bitumen production rate of million cubic metres ( million barrels) in 00, the crude bitumen reserves are equivalent to years of production This figure would fall as bitumen production increases Projects and plans are underway to develop the oil sands further and increase the production of bitumen and synthetic crude oil As a basis for this discussion, we have used the Purvin & Gertz 00 forecast for Western Canadian supply in Table which is provided at the back of this report This includes conventional light and heavy crudes as well as synthetic crude oil and bitumen blends from the oil sands Overall, the annualized average crude supply is forecast to grow from 00 to 0 by approximately 0 million B/D ( 0 m /d) This is equivalent to,000 B/D 0 ( 0 m /d) each year From 0 to 00, crude supply is forecast to grow by another,000 B/D ( 0 m /d), equivalent to an annual growth rate of,000 B/D ( 0 m /d) Supply forecasts are uncertain but are necessary for forward planning of new facilities such as pipelines In Figure and Table, the Purvin & Gertz forecast is compared with other crude supply forecasts by CAPP in June 00 and by Enbridge in October 00 CAPP s CAPP Statistical Handbook, Section, Reserves, November 00 ERCB, Alberta s Energy Reserves 00 and Supply/Demand Outlook 00-0, June 00 CAPP, Crude Oil Forecast, Markets and Pipeline Expansions, June 00

17 -- Western Canadian Crude Supply and Disposition TransCanada Keystone Pipeline GP Ltd June 00 forecasts include a Pipeline Planning Case and a Moderate Growth Case (the Moderate case) In December 00, CAPP prepared a more recent forecast (the Interim Update ) which is also included The Enbridge and June CAPP forecasts are higher than Purvin & Gertz after 0, although the CAPP Moderate Case is similar The forecast in CAPP s December Interim Update is lower than Purvin & Gertz until 0 FIGURE WESTERN CANADA CRUDE SUPPLY FORECAST COMPARISON (Thousand Barrels Per Day) Forecast (Thousand Cubic Metres Per Day) Enbridge 00 CAPP Pipeline Planning, 00 CAPP Moderate Case, 00 CAPP Interim Update Dec 00 PGI Figure Western Canada Crude Supply Forecast Comparison The supply in CAPP s Pipeline Planning Case is approximately percent higher than in its Moderate Case in 0 and it rises to more than percent higher by 00 The Pipeline Planning Case shows higher production and allows for pipeline operational flexibility Over time, there can be planned and unplanned outages by pipelines, refineries and oil producers, including oil sands operators supplying bitumen blends or synthetic crude oil, so pipelines need additional capacity to sustain annual average throughputs In a market environment where crude production is growing each year, supplies will be greater in the last half of a year compared with the first half, so annualized average throughput estimates are inadequate for pipeline planning Enbridge, Liquids Pipeline Development, Enbridge Day Presentation, October and, 00 CAPP, Interim Update, Western Canadian Crude Oil Forecast, December, 00

18 TransCanada Keystone Pipeline GP Ltd Western Canadian Crude Supply and Markets -- The forecast growth in Western Canadian supply is due to expected increases in oil sands production, both bitumen and synthetic crude from upgrading Oil sands growth should more than offset the continuing declines in conventional crude production Growth in oil sands production is expected from mining as well as in-situ projects Oil sands production forecasts are compared in Figure The 00 forecast of the ERCB is also included Compared with the other 00 forecasts, it has the highest outlook for oil sands production through 0 FIGURE OIL SANDS PRODUCTION FORECAST COMPARISON (Thousand Barrels Per Day) Forecast Figure Oil Sands Production Forecast Comparison (Thousand Cubic Metres Per Day) ERCB 00 Enbridge 00 CAPP Pipeline Planning, 00 CAPP Moderate Case, 00 CAPP Interim Update Dec 00 PGI ERCB, Alberta s Energy Reserves 00 and Supply/Demand Outlook 00-0, June 00

19 -- Western Canadian Crude Supply and Disposition TransCanada Keystone Pipeline GP Ltd (This page intentionally left blank)

20 TransCanada Keystone Pipeline GP Ltd Western Canadian Crude Supply and Markets -- US CRUDE OIL MARKET The US refining industry has a combined crude capacity of approximately million B/D, or million cubic metres per day ( 0 m /d ) In 00, refinery crude runs were approximately million B/D ( 0 m /d) As shown in Figure, crude runs have been slowly rising In the outlook from the Purvin & Gertz 00 forecast, US refinery crude runs are forecast to continue to rise modestly by more than 00,000 B/D ( 0 m /d) by 0 The production of crude in the US has been falling In 00, US crude production was approximately million B/D ( 0 m /d) Further production declines are expected 0 With US crude production at percent of refinery crude runs in 00, crude imports to the US reached 00 million B/D ( 0 m /d) US imports have been rising and further increases are expected due mainly to falling domestic production, as shown in Figure FIGURE US CRUDE OIL SUPPLY / DEMAND 0,000,000,000,000,000 0,000,000,000,000,000 0 (Thousand Barrels per Day) Canadian Crude Imports Other Imports US Crude Production Refinery Crude Runs (Thousand Cubic Metres Per Day) Figure US Crude Oil Supply / Demand Crude oil imports to the US include Canadian crude Due to its rising production and exports, Canada has become the largest single source of imported crude to the US, with approximately million B/D (0 0 m /d) in 00, including East Coast crude Canadian crude exports to the US are expected to rise with growing production, assuming pipeline capacity continues to grow

21 -- Western Canadian Crude Supply and Disposition TransCanada Keystone Pipeline GP Ltd Canadian crude reaches many refining markets within the US The US is divided into five regions known as Petroleum Administration for Defense Districts ( PADDs ) These are shown on the map in Figure PADD I is the East Coast; PADD II is the Midwest; PADD III is mostly the Gulf Coast; PADD IV is the Rocky Mountain region; and PADD V is the West Coast, including Alaska and Hawaii FIGURE PETROLEUM ADMINISTRATION FOR DEFENSE DISTRICTS (PADDs) IV II PADD V includes AK, HI V I III Figure Petroleum Administration for Defense Districts (PADDs)

22 TransCanada Keystone Pipeline GP Ltd Western Canadian Crude Supply and Markets -- CANADIAN CRUDE OIL DISPOSITION 0 The disposition forecast for Western Canadian crude is shown in Table This includes deliveries to the Texas Panhandle and the USGC within PADD III The USGC deliveries include Keystone XL Pipeline shipments of 0,000 B/D (0 0 m /d) starting in 0 Within PADD III, some of the Canadian crude is now being supplied to the Texas Panhandle via Cushing, Oklahoma, so is not available to the USGC WRB Refining (formerly ConocoPhillips) is using Canadian heavy crude at its Borger, Texas refinery and has plans for a project to use more Canadian crude by 0 The existing Pegasus pipeline, owned by Mobil Pipeline, was reversed in 00 to supply up to,000 B/D (0 0 m /d) of Canadian crude to the USGC In this report, it is assumed to operate permanently although its initial commitments were for five years (until early 0) and it could shut down after Keystone XL Pipeline commences operations In addition, Table and Figure show Purvin & Gertz 00 disposition forecast for Canada and US PADDs I, IV and V Deliveries in Canada are to refineries in Western Canada and Ontario and the forecast allows for higher deliveries to Ontario, assuming the replacement of imports Deliveries to PADDs I and IV are needed to meet local refinery demand Deliveries to PADD V have been mostly to Washington state refineries Overall, deliveries to these markets are forecast to rise EnCana website: Downstream/Borger, October 00

23 0 -- Western Canadian Crude Supply and Disposition TransCanada Keystone Pipeline GP Ltd FIGURE WESTERN CANADA CRUDE SUPPLY/DEMAND FORECAST,000,00,000,00,000,00,000,00, (Thousand Barrels Per Day) Supply Deliveries in Canada Deliveries to PADDs I, IV & V (Thousand Cubic Metres Per Day) Deliveries to PADD II Deliveries to PADD III Figure Western Canada Crude Supply/Demand Forecast Table and Figure show the remaining volume of Canadian crude available for PADD II which is the largest market for Western Canadian crude Canadian crude deliveries to PADD II are forecast to increase throughout the forecast period except for 0, the year in which Keystone XL Pipeline comes onstream

24 TransCanada Keystone Pipeline GP Ltd Western Canadian Crude Supply and Markets -- US GULF COAST CRUDE OIL MARKET 0 The Keystone XL Pipeline is intended to deliver Canadian crude to the USGC in PADD III which includes states from New Mexico to Mississippi PADD III has the largest refining system in the world with approximately million B/D ( 0 m /d) of crude capacity, mainly at the USGC in Texas and Louisiana The refineries are listed in Table with their current crude capacities As shown in Figure, refinery crude runs have increased and reached approximately million B/D ( 0 m /d) in 00 Crude runs in PADD III are projected by Purvin & Gertz to grow by over 00,000 B/D ( 0 m /d) by 00 The PADD III refineries run crude to produce refined products which are consumed in PADD III and other PADDs Large volumes of refined products are shipped by pipeline to PADDs I and II Future refinery crude runs will depend on US demand for refined products and product trade and could be higher or lower than forecast FIGURE PADD III CRUDE RUNS - BY SOURCE,000 0,000,000,000,000,000,000,000,000,000,000 0 (Thousand Barrels Per Day) Canadian Crude Imports (incl Keystone XL after 0) Other Crude Imports Domestic Crude Use PADD III Crude Production (Thousand Cubic Metres Per Day) Refinery Crude Runs Figure PADD III Crude Runs By Source PADD III crude production was approximately million B/D (0 0 m /d) in 00 Production declines have been limited in recent years as growth in offshore Gulf of Mexico production has nearly offset the decline in onshore production However, PADD III crude production is expected to decline in the long term

25 -- Western Canadian Crude Supply and Disposition TransCanada Keystone Pipeline GP Ltd 0 The use of domestic crude production by PADD III refineries is forecast to remain near current levels Approximately million B/D ( 0 m /d) of the PADD III production, or percent, was used by PADD III refineries in 00 The remaining million B/D (0 0 m /d) of production was shipped by pipelines to refineries in other PADDs, mostly PADD II PADD III crude transfers to PADD II are expected to decline as PADD II uses more Canadian crude leaving a higher proportion of the indigenous crude in PADD III Most of the crude used in PADD III is imported Imports have grown to million B/D ( 0 m /d) in 00 or percent of crude demand Imports are forecast to decline initially before 00 as more of the domestic PADD III crude production is used in PADD III, and then to increase by over 00,000 B/D ( 0 m /d) by 00 The refining industry in PADD III uses a wide variety of crudes including light sweet, medium sour, heavy sour, high acid heavy sweet, and others such as synthetic crudes from Venezuela Many of the refineries have large coking capacity, so they can run significant amounts of heavy crudes which generally have an API gravity below

26 TransCanada Keystone Pipeline GP Ltd Western Canadian Crude Supply and Markets -- 0 In 00, heavy crude runs were approximately million B/D ( 0 m /d) or percent of total crude runs Nearly all of the heavy crude used in PADD III is imported Heavy crude runs fell from 00 to 00 due to reduced supply of heavy crude, especially from Mexico, as shown in Figure In the first eight months of 00, heavy crude supplies from Mexico and Venezuela fell another 00,000 B/D ( 0 m /d) approximately Heavy crude imports from other countries increased, but there was a net reduction in heavy crude use of approximately 00,000 B/D ( 0 m /d) Some of the increased heavy crude was heavy sweet, high acid crude from Brazil and Angola However, heavy sweet crudes are less desirable than heavy sour crudes for refineries which are designed for conventional heavy crudes similar to Canadian bitumen blends FIGURE PADD III HEAVY CRUDE SUPPLY,000,00,000,00, (Thousand Barrels Per Day) Mexico Other Foreign Canada Venezuela Domestic Notes: Data from US DOE import statistics 00YTD includes January to August (Thousand Cubic Metres Per Day) Refinery Heavy Crude Runs YTD Figure PADD III Heavy Crude Supply Most of the heavy crude is used by refineries which employ coking technology to upgrade heavy vacuum residual oil Based on the US Department of Energy ( DOE )/Energy Information Administration ( EIA ), Petroleum Supply Monthly statistics, coker feed fell in the first eight months of 00 to 0 million B/D ( 0 m /d) from million B/D ( 0 m /d) in 00, a drop of more than percent This is consistent with a reduced supply of heavy feedstock

27 -- Western Canadian Crude Supply and Disposition TransCanada Keystone Pipeline GP Ltd The production of heavy crude from Mexico has been falling as shown in Figure USGC refinery crude runs of Mexican heavy crude have fallen by around 0,000 B/D ( 0 m /d) since 00 due to falling production In particular, production from the offshore Cantarell field which produces most of the Maya heavy crude is falling rapidly With limited restoration plans in sight, it appears that production from Mexico will continue to decline for several years The International Energy Agency ( IEA ) forecasts a decline in total crude production from Mexico of million B/D ( 0 m /d) between 00 and 0 FIGURE MEXICO HEAVY CRUDE BALANCE,000,00,00,00,00,00, (Thousand Barrels Per Day) Export to USGC Export to Other Countries Mexico Production YTD Figure Mexico Heavy Crude Balance (Thousand Cubic Metres Per Day) Export to Other US Mexico Demand Notes: Data from Petroleos Mexicanos Sistema de Informacion Energetica ("SIE") & US DOE import statistics 00YTD includes January to August IEA, World Energy Outlook, 00, page, Table -

28 TransCanada Keystone Pipeline GP Ltd Western Canadian Crude Supply and Markets -- Most of Venezuela s crude production is heavy crude Over half of the production is exported to the US Venezuela s total crude production increased between 00 and 00 but most of the incremental production was sold to markets outside of the US as shown in Figure Since the Venezuela refinery crude capacity is approximately million B/D 0 (0 0 m /d), and crude use outside of the US has been less than this since 00, Venezuela s exports to markets other than the US have been relatively small Since 00, Venezuelan crude production has fallen, so refinery use in the US and the other markets has also fallen Venezuela has large reserves of heavy oil, but future supply will likely depend on commercial, market and political strategies which may oppose supplying US refineries and favour exports to other markets FIGURE VENEZUELA CRUDE BALANCE,00,000,00 (Thousand Barrels Per Day) (Thousand Cubic Metres Per Day) Export to US Domestic Demand plus Exports (excl US) Venezuela Production 00 00,000,00, Note: From Petroleum Intelligence Weekly and US DOE import statistics 00YTD includes January to August YTD Figure Venezuela Crude Balance Although traditional supplies of heavy crude have been falling, the USGC refineries as a group are increasing their capability to use more heavy crude, by adding coking capacity For example, Motiva, a joint venture of Saudi Aramco and Shell, has commenced a large expansion project at Port Arthur with,000 B/D ( 0 m /d) of new crude capacity and,000 B/D Oil and Gas Journal, 00 Worldwide Refining Survey, December, 00 Shell website, Major Projects and Oil & Gas Journal Worldwide Construction Update, November, 00

29 -- Western Canadian Crude Supply and Disposition TransCanada Keystone Pipeline GP Ltd 0 ( 0 m /d) of new coking capacity for a 0 startup; with coking capacity at percent of crude capacity, this should allow more heavy crude runs Marathon has a project at Garyville, Louisiana 0, with a 0,000 B/D ( 0 m /d) crude expansion and a,000 B/D (0 0 m /d) coker which are under construction and scheduled for startup in late 00 Total is building a 0,000 B/D ( 0 m /d) coker at its,000 B/D ( 0 m /d) Port Arthur refinery for startup in 0 Smaller coker expansions are underway at Hunt, Tuscaloosa, Alabama ; Valero, St Charles, Louisiana ; Flint Hills, Corpus Christi, Texas, for startup in 00 In light of declining crude supplies from Mexico and Venezuela, some USGC refiners are attempting to diversify their sources by accessing Western Canadian supplies For example, subject to regulatory approval, Valero Energy has agreed to participate as a prospective shipper on the Keystone XL Pipeline to Port Arthur, and has secured heavy crude oil from several Canadian oil producers Valero operates three coking refineries in the area around Houston and expects to be one of the largest recipients of heavy crude from the Keystone XL Pipeline Canadian Natural Resources Limited ( CNRL ) has committed 0,000 B/D ( 0 m /d) to the Keystone XL Pipeline project, if approved, and also has agreed to supply 00,000 B/D ( 0 m /d) of heavy crude to an unnamed, USGC refiner 0 Marathon Press Release, November, 00 Total website, Downstream 00 and Downstream Segment 00 Argus Petroleum Coke, Page, February, 00 Valero Presentation, Lehman Brothers Energy/Power Conference, September, 00 Flint Hills, Oil & Gas Journal Worldwide Construction Update, November, 00 Valero News Release, July, 00 CNRL 00 Second Quarter Results, August, 00

30 TransCanada Keystone Pipeline GP Ltd Western Canadian Crude Supply and Markets -- Refineries Supplied By Keystone XL Pipeline 0 0 The proposed Keystone XL Pipeline would deliver up to 00,000 B/D ( 0 m /d) of heavy and light Canadian crudes to terminals near Nederland and Houston From these terminals, crude could be delivered on other pipelines to many refineries There are refineries which would have access to Canadian crudes delivered on the Keystone XL Pipeline These are listed as Group refineries in Table They are situated near Port Arthur and Houston as well as Texas City and Lake Charles, Louisiana Their combined crude capacity is 0 million B/D ( 0 m /d), or nearly half of total PADD III refining capacity, and this is larger than the entire PADD II market With the Motiva refinery expansion, the combined crude capacity will increase to million B/D ( 0 m /d) Purvin & Gertz estimates of the refinery crude runs for Group are shown by type and source in Table for 00 Heavy crude use at these refineries is estimated at million B/D ( 0 m /d), nearly all of which was imported Light crude runs in 00 are estimated at million B/D ( 0 m /d) of which light sweet crude was,000 B/D ( 0 m /d) and light sour crude was 0 million B/D ( 0 m /d) The majority of the light crude ( percent) was imported; imports are estimated at,000 B/D (0 0 m /d) for light sweet crude and 0,000 B/D ( 0 m /d) for light sour crude The refining area to be supplied by the Keystone XL Pipeline is shown in Figure 0, which shows the Group refineries and some of the major crude pipelines serving the refineries in the area as well as the proposed Keystone XL Pipeline to Nederland and Houston There are many other crude pipelines and inter-connections within the four refining centres that are not shown

31 -- Western Canadian Crude Supply and Disposition TransCanada Keystone Pipeline GP Ltd FIGURE 0 KEYSTONE XL PIPELINE MARKET AREA from Longview, TX WTG from West Texas Mobil from Corsicana, TX to Longview, TX from Wichita Falls, TX to Cushing, OK from Houma, LA Figure 0 Keystone XL Pipeline Market Area

32 TransCanada Keystone Pipeline GP Ltd Western Canadian Crude Supply and Markets The four Port Arthur area refineries have a combined crude capacity of million B/D ( 0 m /d), which will increase to million B/D ( 0 m /d) after the Motiva refinery expansion The three refineries in the vicinity of Lake Charles, Louisiana have a combined crude capacity of,000 B/D ( 0 m /d) and Canadian crude delivered on the Keystone XL Pipeline would have to be supplied from the Port Arthur area on a CITGO pipeline from Sour Lake, Texas or a DOE line from Nederland, Texas The five Houston area refineries have a combined crude capacity of million B/D ( 0 m /d) Crude oil can be transported to the Houston area on a Shell pipeline from the Nederland area, and to Baytown, Texas (near Houston) on an ExxonMobil pipeline from Sour Lake The three Texas City area refineries have a combined crude capacity of,000 B/D (0 0 m /d) Canadian crude delivered on the Keystone XL Pipeline would have to be supplied to Texas City from the Houston area via existing pipelines such as the BP pipeline The Keystone XL Pipeline would be able to deliver light crude as well as heavy crude In total, all the PADD III refineries used approximately million B/D (0 0 m /d) of light sweet crude including million B/D ( 0 m /d) of imports in 00 The Group refineries used only,000 B/D ( 0 m /d) of light sweet crude If there are low delivery volumes from the Keystone XL Pipeline, light sweet synthetic crude would compete with conventional light sweet crude However, if synthetic crude deliveries are as high as 00,000 B/D ( 0 m /d), synthetic crude would likely have to compete with conventional light sour crudes Purvin & Gertz expects that, if the Keystone XL Pipeline is constructed, the USGC market can absorb an incremental 00,000 B/D ( 0 m /d) of Canadian crude, which represents around percent of the crude capacity of the Group refineries The refinery crude capacity is expanding by another,000 B/D ( 0 m /d) to million B/D ( 0 m /d) by 0 Shipper commitments on the Keystone XL Pipeline are for 0,000 B/D (0 0 m /d) Based on the import volumes in PADD III, the Canadian crude imports could be heavy crude or a combination of heavy and light synthetic crudes delivered on the Keystone XL Pipeline, assuming adequate distribution connections at the USGC

33 0 -- Western Canadian Crude Supply and Disposition TransCanada Keystone Pipeline GP Ltd (This page intentionally left blank)

34 TransCanada Keystone Pipeline GP Ltd Western Canadian Crude Supply and Markets -- PADD II CRUDE OIL MARKET 0 0 The availability of Western Canadian crude oil to PADD II is part of the supply and disposition forecast in Table In 00, PADD II received approximately million B/D ( 0 m /d) of Canadian crude which was nearly 0 percent of the Western Canadian supply As Canadian supplies grow, deliveries of Canadian crude to PADD II are also forecast to grow Synthetic crude runs in PADD II should increase from relatively low levels The use of Canadian bitumen blends should also increase in PADD II due to the current construction of several new coker projects at PADD II refineries; these projects include BP at Whiting, Indiana ; Marathon at Detroit, Michigan ; WRB Refining at Wood River, Illinois ; and Sinclair at Tulsa, 0 Oklahoma PADD II encompasses states in the Midwest from the Canadian border, south to Oklahoma and east-west between the Dakotas and Ohio PADD II is a large market for crude oil with refineries having a combined crude capacity of million B/D ( 0 m /d) Total crude runs in 00 were around million B/D ( 0 m /d) Refinery runs of Canadian crude have increased to around one third of total runs and are expected to rise with increased Canadian supplies The PADD II refineries also use US domestic crudes produced mainly in PADD II, Texas and Louisiana, and they import crudes via pipelines from the USGC As Canadian production grows, Figure, developed by Purvin & Gertz, shows that Canadian crudes are expected to displace some of the US domestic crudes from PADD II as well as other imports which are delivered from the USGC The Canadian crude supply to PADD II in the BP Press Release, September 0, 00 Marathon 00 Annual Report EnCana 00 Annual Report 0 Foster Wheeler Corporation News Release, September, 00

35 -- Western Canadian Crude Supply and Disposition TransCanada Keystone Pipeline GP Ltd figure is estimated without deducting deliveries to the USGC via the Keystone XL Pipeline The Canadian crude will likely continue to replace more of the domestic crudes and imports in northern PADD II as refineries add residual conversion capacity In addition, more Canadian crude will likely move further south as pipelines expand within PADD II 0 FIGURE PADD II CRUDE RUNS - BY SOURCE,000 (Thousand Barrels per Day) (Thousand Cubic Metres Per Day) Canadian Imports 00,000 Other Imports 00,000 Domestic Receipts From Other PADDs 00 Indigenous Production Refinery Crude Runs 00, ,000 00, Figure PADD II Crude Runs by Source The volume of Canadian crude available for PADD II depends on the overall supply of Western Canadian crude Several supply scenarios are considered in Table Based on the Purvin & Gertz supply forecast, the Canadian crude available for PADD II would decrease in 0 following the startup of Keystone XL Pipeline, but it would increase each year thereafter Under the CAPP Interim Update supply forecast, crude for PADD II in 0 would be similar to the forecast level for 00, and would increase to the 0 forecast level by 0 The CAPP Moderate supply forecast is similar to the Purvin & Gertz forecast, so supply to PADD II would grow to a slightly higher level using this forecast The CAPP Pipeline Planning supply forecast and the Enbridge supply forecast would provide the most crude to PADD II Using these forecasts, deliveries to PADD II in 0 would exceed 00 forecast deliveries The forecasts of deliveries to PADD II, which are based on the supply forecasts, are compared in Figure

36 TransCanada Keystone Pipeline GP Ltd Western Canadian Crude Supply and Markets -- FIGURE FORECAST COMPARISON OF CANADIAN CRUDE DELIVERIES TO PADD II (Thousand Barrels Per Day) Based on Supply: Enbridge 00 CAPP Pipeline Planning, 00 CAPP Moderate, 00 CAPP Interim Update Dec 00 PGI 00 PGI Demand Estimate (Thousand Cubic Metres Per Day) Keystone Pipeline XL Startup Figure Forecast Comparison of Canadian Crude Deliveries to PADD II The figure also shows Purvin & Gertz 00 forecast of demand for Canadian crude in PADD II, consistent with Figure In Figure, the demand is higher than the Purvin & Gertz forecast of deliveries because the latter calculates the availability for PADD II after deducting the Keystone XL Pipeline committed deliveries from the supply With lower Canadian deliveries, PADD II refineries would need more domestic crude or other imports to sustain crude runs 0 With higher Canadian crude deliveries based on CAPP s Pipeline Planning case or the Enbridge supply forecast, the deliveries would exceed the Purvin & Gertz demand forecast This would satisfy additional refinery demand, if any, or require that more Canadian crude be directed to other markets Potential refinery demand for Canadian crudes in PADD II may be higher than forecast, depending on the crude types available, since some PADD II refiners are developing projects to use more Canadian crude If other markets are needed for additional crude supply, more pipeline capacity from Canada to those markets may also be needed The volume of Canadian crude available for PADD II also depends on the volumes delivered elsewhere The deliveries to other markets could change from the forecast in Table The volume delivered to the USGC would increase by another 0,000 B/D ( 0 m /d) by 0 if Keystone XL Pipeline delivers at 00,000 B/D ( 0 m /d) This would decrease the availability in PADD II as shown in Table On this basis, with the Keystone XL Pipeline at capacity and Pegasus Pipeline continuing to operate, the deliveries of Canadian crudes to PADD II in 0 would be about the same as the 00 deliveries using the Purvin & Gertz

37 -- Western Canadian Crude Supply and Disposition TransCanada Keystone Pipeline GP Ltd supply forecast, but higher than the 00 deliveries using the June CAPP and Enbridge supply forecasts Based on the CAPP Interim Update forecast, the deliveries of Canadian crude to PADD II in 0 would be approximately the same as the 00 forecast deliveries All the supply scenarios lead to forecasts of growing deliveries to PADD II after 0

38 TransCanada Keystone Pipeline GP Ltd Western Canadian Crude Supply and Markets -- CANADIAN CRUDE OIL PRICING Limited volumes of Canadian heavy crude has been delivered to the USGC on the Pegasus pipeline since early 00 However, the price of Canadian heavy crude has been discounted at the USGC Delivery of a large volume of Canadian crude on the Keystone XL Pipeline to the large USGC market is expected to strengthen the price of Canadian heavy crude at the USGC and in Alberta for reasons discussed below in this section 0 Figure compares the delivered price of Canadian Cold Lake bitumen blend ( CLB, also known generally as DilBit ) against the price of Mexican Maya heavy crude at the USGC The figure indicates a USGC discount on DilBit most of the time since 00 as these crudes are similar in quality and have nearly equivalent values to refiners This price discount suggests that the supply of Canadian heavy crudes has exceeded demand in their main markets north of the USGC Up until 000, the DilBit price was stronger and was equivalent to the Maya price around Wood River in the Midwest (as shown in the figure); DilBit was a price taker in the Midwest versus other crudes since supply did not exceed demand and other imports were needed FIGURE COLD LAKE BLEND PRICING (US Dollars per Barrel) Maya-CLB, Wood River Maya-CLB, USGC Jan- Jan- Jan- Jan-00 Jan-0 Jan-0 Jan-0 Jan-0 Jan-0 Jan-0 Jan-0 Jan-0 Figure Cold Lake Blend Pricing CLB Discount CLB Premium The prices and costs in this discussion are in US dollars unless noted otherwise

39 -- Western Canadian Crude Supply and Disposition TransCanada Keystone Pipeline GP Ltd 0 0 The Keystone XL Pipeline to the large USGC market would expand the market for Canadian heavy crudes and increase demand This should allow the price of Canadian heavy crude to increase at least as far as USGC parity with Maya The price for Canadian heavy crude could increase further if the Keystone XL Pipeline causes the available supply in the Midwest to be less than the demand, resulting in a price equivalent to Midwest parity with imported Maya crude, as it was before 000 At the USGC, the average price discount on Cold Lake Blend is estimated to have exceeded $00 (US) per barrel versus Maya since, as shown in Figure, when the Pegasus pipeline to the USGC started up However, the prices have been volatile; the monthly discount has been much higher and occasionally there has been a small premium at the USGC More recently in 00, the average discount at the USGC was approximately $ per barrel To be conservative for discussion purposes, we have assumed a price discount of $00 per barrel, recognizing that the average discount was higher in 00 and 00 By increasing market access for Canadian heavy crudes, the $00 per barrel discount should be avoided in the future The price increase should apply to all of the Canadian heavy crude supply, not just the volume shipped on the Keystone XL Pipeline The market price received from refiners in other markets such as the Midwest would not necessarily be the same as the price received from USGC refiners for the DilBit which is shipped to the region under ship-or-pay commitments The vast majority of the Western Canadian crude ( percent in 0 based on Table ) would be delivered to refineries in markets other than the USGC This crude would be supplied at a price which is determined by competition in the market This should establish a market price for the Canadian crudes other than the committed volume which is shipped on the Keystone XL Pipeline The market prices of offshore crudes delivered to PADD II are higher than the USGC prices because these crudes are delivered north from the USGC by pipeline, and this adds to the delivered crude cost Removing volumes from the PADD II market could cause PADD II demand to exceed the available supply Purvin & Gertz expects that PADD II would be the competitive market for Canadian crudes after the

40 TransCanada Keystone Pipeline GP Ltd Western Canadian Crude Supply and Markets -- Keystone XL Pipeline startup since the PADD II refiners would have demand for the crude which exceeds the available supply that Purvin & Gertz has forecast in Table The Midwest heavy crude prices are affected by the pipeline tolls between the Midwest and the USGC Using current pipeline tolls, the Midwest price of imported heavy crude at Patoka, Illinois delivered from the USGC is $ per barrel higher than the USGC price, based on the Capline toll from St James, Louisiana to Patoka If it is not surplus to PADD II, 0 0 Canadian heavy crude supply would not move from PADD II to the USGC and would not incur the toll of $ per barrel on the Mobil Pegasus pipeline from Patoka to Beaumont, Texas Based on the combined tolls, the increase in the Canadian heavy crude price at Patoka would be $ per barrel over USGC parity In this scenario with Midwest price parity against Maya, Midwest demand for Canadian heavy crude would exceed the available supply and the market price of Cold Lake Blend would be approximately $ per barrel above the 00 price level at Patoka If the available supply for PADD II exceeds PADD II demand, the market price would likely fall to parity elsewhere If so, sufficient pipeline capacity would be needed to deliver the Canadian crudes to other markets so that price discounting does not re-occur There may be other events that affect the DilBit price which were not considered in this report if not related to the Keystone XL Pipeline Synthetic crude oil may also move to the USGC market as production grows If so, the price of synthetic crude could drop to USGC parity with conventional light crudes However, as for heavy crudes, ship-or-pay commitments on a pipeline to the USGC could mitigate potential price discounts for synthetic crude and allow a market price which is equivalent to parity with light crude in PADD II FERC Tariff, Amoco Capline for viscosity of SUS FERC Tariff A-, Mobil Pipeline for heavy crude

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